Sino-Forest Corp. made its most aggressive effort yet to reject allegations of fraud on Tuesday, telling a packed conference call there is no truth to Carson Block’s explosive claims. Chief executive Allen Chan said he remains steadfast in the long-term value and growth prospects of his company.

“It pains me to see a company that I have successfully built over the past 17 years maliciously attacked by a self-serving short seller who stands to reap significant gains,” Mr. Chan said.

His outreach didn’t work. The beleaguered stock plunged a further 32.5% as investors were unconvinced by Mr. Chan’s explanation of his business. Instead, they continued to put their faith in Mr. Block.

In an attempt to ease shareholder concerns, Mr. Chan went to lengths to explain Sino-Forest’s complex business model.

Essentially, Sino-Forest acquires trees in China through subsidiaries in the British Virgin Islands, which hold the trees for roughly three years before selling them to undisclosed customers known as “authorized intermediaries” (AI).

He stressed that the suppliers and buyers of trees in this process are two different entities and said sales proceeds are kept in the country and reinvested to buy more trees in an ongoing cycle.

Mr. Block has referred to this model as “unnecessary, overly complicated and risky” for a legitimate business, a point he reiterated Tuesday in a lengthy note responding to the conference call.

Mr. Chan said Sino-Forest set up the AI system in the 1990s, when it was the only structure the company could use to do business in China. Mr. Block said that fails to explain why the company continues to use this model today.

A more specific concern is the fact that the company refuses to identify who these intermediaries are.

Mr. Chan stated that the Chinese forestry business is “highly competitive” with a lot of domestic and foreign newcomers entering the market. Giving away the names of these entities would eliminate a competitive advantage, he said.

He pointed out that after one of Sino-Forest’s AIs was disclosed in 2004, several small-scale competitors were able to undercut Sino-Forest on price. The company currently enjoys a 55% gross margin on standing timber sales.

“We feel it is important to protect our business acumen and industry intelligence,” he said.

Sino-Forest did introduce credit analysts to one of its AIs this year, and it plans to introduce equity analysts to “at least” one of them on a tour of its operations in China next month.

“We’re trying to balance the long-term strategic positioning of the company with the demands of the capital markets and find the best way to do that,” chief financial officer David Horsley said in an interview. Mr. Horsley also said that the company does not want to reveal the specific locations of its plantations because of the same competitive concerns.

The sell-off in Sino-Forest shares Tuesday reflects the fact that investors still do not fully comprehend the company’s business, experts said.

“I doubt I would ever understand the AI structure,” said Shawn Allen, a financial analyst who is the owner and editor of investorsfriend.com, a stock advisory service based in Edmonton. Mr. Allen, who publicly expressed concerns about Sino-Forest as far back as 2005, said most financial reports don’t list customers, but that they should be identified in this case.

“If you say you sold to someone and that is questioned as fraud, I think you probably have to show who you sold to and have them verify it,” he said.

Richard Kelertas, a Montreal-based analyst at Dundee Capital Markets who has supported Sino-Forest, nonetheless said the company needs to disclose why its complex structure is necessary. He wrote that the company could have been more forceful and clear in some of its responses to analysts on the call.

Sino-Forest, whose shares have fallen more than 80% since June 2 when Mr. Block’s report on the company was made public, has set up an independent committee to investigate Mr. Block’s allegations, and committee chairman William Ardell said that at least two to three months will be needed to complete the investigation. Mr. Block called that an “aggressive timeline.”

Active Investor was produced by Postmedia's advertising department in collaboration with iShares by BlackRock to promote awareness of this topic for commercial purposes. Postmedia's editorial departments had no involvement in the creation of this content.

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